The dollar also weakened due to lower rates on the Fed rate hik

The jump in the euro, which pushed it even further from the sub-par levels of last week, coincided with a drop in expectations of an aggressive rate hike by the Federal Reserve by 100 basis points this month, which brought down the dollar.

The euro rose to $1.0259, up 1.2% on the day and hitting its highest level since July 6, as money markets estimated a 60% chance of a 50 basis point increase on Thursday, up from 25% on Monday.

The dollar index fell 0.9% to 106.47, significantly down from a high of 109.29 last week, a level not seen since September 2002.

However, analysts are reluctant to be optimistic about the euro, given the continuing concerns about natural gas supplies and a blow to the country's economy, as well as how aggressive the ECB may actually be.

"In our view, this rebound is likely to be short-lived and should provide better entry levels for euro short positions," said Dominic Bunning, head of European currency research at HSBC.

"Even if the ECB does raise the rate by 50 bps, the positive effects on the euro may be limited," he added, noting that 50 basis points "no longer look so hawkish" against the background of larger increases from the likes of the Fed and the Bank of Canada, and that close to 150 b.p. ECB tariff increases in 2022 have already been taken into account.

Traders are also preparing to see whether the Russian gas supply through the Nord Stream pipeline to Germany will resume on Thursday after a stop for scheduled maintenance.

Russia's Gazprom, which operates the pipeline, has told consumers in Europe that it cannot guarantee gas supplies due to "extraordinary" circumstances, according to a letter seen by Reuters, raising the stakes in the economic standoff with the West.

The Australian dollar rose 1.3% to $0.6903 after Reserve Bank of Australia policymakers said they saw the need for further policy tightening in addition to recent increases.

"The RBA board has reduced the intensity of its rhetoric," Westpac economist Bill Evans wrote in a research note. "Another 50 basis points in August seems very likely."

The Japanese yen rose to 137.57 yen per dollar, but was not far from a 24-year low ahead of the Bank of Japan's policy decision on Thursday. In recent days, the central bank has repeatedly committed to continue ultra-light adjustments.

The pound rose 0.7% to $1.2027, tracking a broader rebound against the dollar.

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